What is a short delivery?
Short delivery is a transaction where the seller fails to deliver (to the buyer) the shares that have been sold.
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The equity delivery segment operates on a T+1 rolling settlement which means whenever you buy shares in the delivery segment and do not square off or sell the shares on the same day, then the shares come to your Demat account on the T+1 day as per the settlement cycle.
Example: If you buy ABC shares on delivery on Monday (T day) and if you do not square off the shares on the same day then ABC shares will come to your Demat account on Tuesday (T+1).
Similarly, if you sell shares, you need to deliver the shares as per the settlement cycle.
When does the transaction result in short delivery?
A short delivery arises when the seller for whatever reason is unable to deliver the shares as per the settlement cycle.
Why does the seller not give delivery of the shares?
- There can be a few scenarios where the sellers have sold the shares in an intraday transaction that they do not hold or didn't square off the positions at the end of the day. This can result in short delivery.
- Secondly, if the seller has sold some illiquid scrips in the intraday segment which the seller does not hold but due to market conditions, the script price reaches the upper circuit due to which the seller is not able to buy back the shares it also will result in a short delivery.
In such scenarios, the buyer does not get the shares even after paying the full amount. The solution to this is, the auction is done by an exchange auction market in which the user either gets the shares or gets credit which is given in the trading account on the basis of the closeout price.
What is an auction?
- Auction is a mechanism by which an Exchange auctions the shares of the seller/investor who was not able to deliver/provide the shares which were sold.
- The Exchange specifies a price range within which the auction participants can offer to sell their shares.
What is a close out settlement or close-out price?
If on the settlement day (T+1), any client is unable to deliver the sold shares, then such a contract shall be closed out at the auction price, if the auction price is not available then at the highest rate at which the ISIN traded on the T day / T+1 day
Here’s an example to better understand this:
For a closeout, the highest rate of 205 would be considered and accordingly, the seller's ledger would be debited with the closeout bill (No. of Shares X ₹. 205) and similarly, buyer's account would be credited with the closeout bill.